Market Update: 3 Charts to Watch in the Week Ahead

See It Market

Sep. 24, 2012, 3:59 AM

By Andrew Nyquist This week's market update is going to be short and to the point. I believe much of the coming action in the weeks ahead will key on three of the Fed's intended QE3 performance targets: the Banks, the Dollar, and Equities. And if these "targets" are a useful measuring stick, then so far, so good. The unprecedented amounts of monetary stimulus have clearly been working on a short-term basis: The banks are enjoying their booster shot, the dollar is technically broken, and equities are higher.

On a longer term basis, experiments like this open the door to wild speculation. And truth is, any economist or investor claiming to know exactly how this will play out one year, 3 years, or even 5 years from now is blowing smoke. We just don't know… but that's why investors have to limit their focus and follow the most important indicator available: Price.

After the recent QE3 price burst higher, the S&P 500 spent the past week backing and filling. And looking at the daily S&P 500 chart below, it's obvious that this was long overdue. Dipping as low as 1450, some may argue that the "dip" is over, however, I believe that last week's low needs to be retested (at a minimum) and may very well give way to stronger support near 1440. On the flip side, if the dip is just a dip, and the low is in, then open gaps at 1478 and even as high as 1497 may come calling, however unlikely for this week.

S&P 500 Daily Chart:

As well, much of the equity run higher is due to Fed-induced dollar weakness. In short, a weak dollar tends to be a tailwind for equity prices. And in the chart below, it's apparent that equities have benefited greatly from a softer dollar of late. In fact, the dollar's recent slide included a technical breakdown through its 18 month uptrend line. This puts the dollar in a weaker intermediate term condition. BUT, on a short term basis, the Dollar has hit important indicator levels that often coincide with a bounce: sub 30 RSI and a dip to the 50% Fibonacci Retracement support.

US Dollar Daily Chart:

Another benefactor to the Fed's monetary stimulus has been the banks. And similar to the overall equity markets, the Banks have raced higher into and out of the QE3 announcement… and are just now pulling in. But note the MACD dip lower in the charts below. If it continues lower, then I suspect that one of the two preceding scenarios will play out - see the chart below. This is further reason to watch the character of of the price action.